Recently a client sent me the following chart comparing the performance of companies in the S&P 1500 Index (NYSEARCA:ITOT) that had buyback programs in place vs. those that did not.
I am sure many of you are surprised by the facts in the chart above, but being a Main Street analyst I was not as much, as I am not a big fan of buybacks to start with. I can say that because it is my belief that when a company buys back its shares (in the majority of cases) it is using money that could have been better put to use elsewhere. By elsewhere, I mean investing in potential growth opportunities (in order to grow the business on Main Street) or buying out a competitor and moving towards the ultimate goal of every successful company = economies of scale.
In this zero to negative interest rate environment things have gotten so pathetic that some CEOs can't resist the temptation of borrowing hand over fist in order to buy back as much of the company's shares as possible. This behavior should be of concern to the investor, as this is usually done to either mask poor performance (such as declining profits or revenue) or to cover the large stock options being awarded to management. In some cases buying back stock can be beneficial, but CEOs borrowing money to buy back stock is like you taking on credit card debt in order to pay down your mortgage, even though you may have a lot of cash in your savings account. Thus we have debt for debt's sake.
Debt can be a good thing if it is used to grow a business, such as building a new factory when demand for the company's products is high, but to borrow to buy back shares demonstrates a short term mentality on behalf of management and that can be dangerous for you as an investor. Of course there are always exceptions to the rule, where companies like Apple (NASDAQ:AAPL), which has a serious tax situation (with its offshore assets that it cannot bring back home, because it would need to pay large corporate taxes on those assets if it did). Aside from that I am not a big fan of borrowing money to buy back shares, as it again demonstrates short-term thinking from management.
Nevertheless, I would imagine that some of you here on Seeking Alpha invest in ETFs that are specially designed to invest in companies that do buybacks, so I thought I would analyze one for you here today. For those new to this type of analysis, I would suggest that you first read an introduction that I wrote in an article here on Seeking Alpha.
Today I will analyze the SPDR S&P 500 Buybacks ETF (NYSEARCA:SPYB) in the same manner and compare it to the various other ETFs, portfolios, funds and indices I have analyzed in the past. The ETF began trading on February 5, 2015, so we do not have much of a performance track record to use in our analysis, but nevertheless we are still able to see a pattern develop were it seems to be matching the performance of the first chart on buybacks that I introduced at the beginning on this article.
Coming in with a -7.93% performance right out of the gate does not inspire much confidence, especially when the ETF takes its buyback holdings straight out of the S&P 500 Index (NYSEARCA:SPY) that it is designed to compete against. But again that is the past and I would imagine that everyone reading this article is interested in how this ETF may perform in the future? Obviously no one on earth can ever tell you what Wall Street will do going forward, but as a Main Street analyst, what I can do for you is analyze each one of the holdings in the SPDR S&P 500 Buybacks ETF and see what my Main Street analysis comes up with. How do I do this?
Well since my Friedrich Algorithm can analyze ten years of a company's balance sheet, income and cash flow statements in about 10 seconds, I thus have the ability to analyze any ETF, Index or Mutual Fund by analyzing each holding or component. That therefore gives us the advantage as it allows me to do a TTM or trailing twelve months analysis of each of the SPDR S&P 500 Buybacks ETF holdings. When we do that we get the following results:
If one were to look at the totals, you would notice that the ETF came in with a final score of 1.14 and that seems to be rather expensive relative to a perfect score being 3.00. But what about the markets in general? Are they also overvalued and how does this ETF stack up in juxtaposition? Well if you look at my profile here on Seeking Alpha you will notice that I am running a whole series of articles analyzing ETF's, Funds, Portfolio's and Indices. The results of all that analysis can be found below in what I call my Friedrich Standings.
The results in the table above do not inspire confidence to start with as the group has a total average percentage passing score of 29% out of 100% and would be an "F" on any school exam. The SPDR S&P 500 Buybacks ETF came in with the third best score of the bunch, as the managers of the ETF tend to invest in larger cap names and thus the ETF cannot be considered as overbought as the S&P 500 Index is. It instead can be compared to the Dow Jones 30 Index (NYSEARCA:DIA) which came in with a 1.19 score.
Going forward, when you compare Wall Street's valuations (as I have done in the 18 examples in the table above) to the reality of how companies are actually doing on Main Street, then one can only conclude that Wall Street and Main Street are on opposite ends of the spectrum. Though many investors believe that buybacks are a good thing and that you would have some advantage by investing in companies that are buying back shares, the facts actually show that there is no advantage at all and that you maybe at a disadvantage in doing so.
Disclosure: I am/we are long AAPL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.